People in the start-up scene know me as a numbers guy and I’ll admit, it’s hard to get a dud deal past me these days.
But believe it or not investing in start-ups is about more than making a buck – for me and most investors I know.
Sure, a deal has to make sense financially. That’s fundamental. Otherwise, call it charity. But once I’m satisfied with the numbers, I get behind a business for the same reasons an entrepreneur does. Passion.
What a start-up investment offers is the pleasure of seeing something worthwhile come to life. It’s about helping put fantastic products onto the market – ideally, the global market. For me, it’s also about putting Australian business on the map. And, soft as it sounds, it’s about helping people realise their dreams.
Which is why good chemistry between investors and entrepreneurs is critical.
Investing in start-ups is not for the faint-hearted. Anyone whose invested more than once knows they’re in for a roller-coaster ride that could end up almost anywhere. It’s a huge punt. And that’s part of the thrill. Otherwise we’d all be pouring our money into safe, boring, blue-chips.
Those tuning into Australian Shark Tank on TEN would observe many entrepreneurs turning up to pitch are after relatively small amounts of cash. (Others are asking for crazy amounts compared to their valuation.) On the first show, the inventor of an absurdly great idea, the portable electric skateboard, asked for a paltry $20,000 to grow his business. He’s well employed and arguably, could access that amount of money through his credit card or a personal loan. Yet he was prepared to give away a sizeable chunk of a business he’d been working on for 20 years. Why?
Because it’s not just about the cash for entrepreneurs either. Many of these participants are smart enough to know the involvement of a Shark and a Shark’s network is worth far more than cash.
The inventor of the infamous ‘Ham Dog’ food concept wasn’t after any cash at all – he was giving away his business to the right investment partner. Someone who had the credibility and the contacts to take that idea to the right commercial partners. The idea captured the imagination of Andrew Banks, who promised to make a few strategic calls to his connections in the fast-food business. One of those phone calls could propel the Ham Dog concept off the drawing board and onto fast-food menus around the world.
Not every Shark was prepared to make that commitment. Which is back to the chemistry. If the idea doesn’t light you up, if it’s not something you can easily and happily talk about to your connections, that should be a warning sign for an investor.
Here’s three things I’ve learned on the journey about how entrepreneurs can target the right investors.
FIND OUT WHO IS INVESTING IN YOUR SPACE. Investors tend to favour a particular type of business category. Generally, it comes from what they know, a territory where they feel most confident and know they can assist.
BE PREPARED TO BUILD A RELATIONSHIP WITH AN INVESTOR OVER TIME. Unlike Shark Tank, most investments happen after a number of meetings and discussions. Some investors I know take a year to make a decision about getting involved with an entrepreneur. During that time they are often listening, observing and offering advice. But once an investor is on board, treat them right and they are potentially the most likely source of further funds for your company – or for you as an entrepreneur if you go on to found another enterprise.
MAKE SURE YOUR EXPECTATIONS ALIGN. Some investors are indeed backroom and don’t want those midnight phone calls or monthly updates. Others will want a board seat and a running commentary on your progress. The best way forward in this area is to have an honest conversation and ask lots of questions. If you’re looking for coaching and introductions, make sure that’s clear from the outset. If you’re unprepared to give up control and take input from your investor, don’t pretend otherwise. It can only end in tears.
Start-up investment is not just a financial commitment, it’s an emotional commitment.
Along the way there will be tears, beers, late night phone calls and, hopefully, a few glasses of champagne.
Do you really want to take that kind of journey (typically 3–5 years without any financial payoff) with someone you don’t like or someone who doesn’t believe in you or your ideas? I don’t.
This article first appeared on Business Review Weekly. View the original here.